CFPB Lives To Fight Another Day Following US Supreme Court Ruling

May 20, 2024
The US Consumer Financial Protection Bureau (CFPB) has survived a major legal challenge after a Supreme Court judgment ruled that its funding structure is not unconstitutional.

The US Consumer Financial Protection Bureau (CFPB) has survived a major legal challenge after a Supreme Court judgment ruled that its funding structure is not unconstitutional.

The US Supreme Court has ruled in a 7-2 vote that the CFPB can continue to fund itself directly through the Federal Reserve System, rather than through Congress.

On Thursday (May 16), the court’s nine justices filed an 18,000-word opinion that struck down a challenge to the CFPB brought by two trade associations.

In 2018, the Community Financial Services Association of America and the Consumer Service Alliance of Texas sued the CFPB in an effort to reverse a newly adopted rule on payday lending.

The plaintiffs alleged that the CFPB’s rule on Payday, Vehicle Title, and Certain High-Cost Installment Loans would “eliminate an entire industry” due to its “draconian” provisions.

At the centre of the disagreement was the rule’s “ability-to-repay” requirement, which stipulates that payday loans can only be given to borrowers whose net income is sufficient to cover all other financial obligations and repay the loan within its initial term.

Consumers use payday loans because their net income can vary and may be insufficient to satisfy these obligations, the plaintiffs argued, making the rule “fundamentally inconsistent” with the product it seeks to regulate.

At the time of the complaint, the two associations said that approximately 12m Americans use payday loans each year, with research showing that, on balance, payday loans improve the financial conditions of their users.

“The Final Rule rests on unfounded presumptions of harm and misperceptions about consumer behavior, and was motivated by a deeply paternalistic view that consumers cannot be trusted with the freedom to make their own financial decisions,” the plaintiffs argued.

“By effectively eliminating a critical form of credit for millions of borrowers who are in dire need of it, the Final Rule severely injures the very consumers the Bureau is charged with protecting.”

An 'unconstitutional' agency

The plaintiffs further alleged that the rule is unenforceable on the grounds that the CFPB’s funding and leadership structure violate the Constitution and the Administrative Powers Act (APA).

Unlike other federal agencies, the CFPB is not funded on an annual basis by appropriations bills passed by Congress.

Instead, the CFPB director has exclusive authority to set the agency’s budget at up to 12 percent of the Federal Reserve System’s operating expenses for each fiscal year. Whatever that amount is, the CFPB director is able to withdraw as much as is “reasonably necessary” to carry out the agency’s duties.

In 2018, the cap was $663m, and by 2022 it had grown to $734m. The plaintiffs described this a “perpetual budget”, which is “exempt even from mere review” by the House and Senate Appropriations Committees.

“The Bureau’s freedom from presidential oversight and control, exclusion from the appropriations process, and exercise of delegated, standardless legislative power contravene established principles of the Constitution’s separation of powers,” the plaintiffs argued.

“Accordingly, the Bureau and all power and authority exercised by it — including the Final Rule — violate the Constitution.”

Justice Samuel Alito, dissenting, agreed with the plaintiffs that this funding structure is “blatantly” unconstitutional. He pointed out that the CFPB budget does not come from Congress, or from the private recipients of its services, or from the entities it regulates.

Instead, it comes from the 12 Federal Reserve banks that make up the Federal Reserve System. These banks are privately-owned, federally-chartered corporations, said Alito, “not departments of the government”.

“It is undeniable that the combination of features in the CFPB funding scheme is unprecedented,” the judge wrote. “And it is likewise clear that this assemblage was no accident. Rather, it was carefully designed to give the Bureau maximum unaccountability.”

CFPB emerges unscathed

Justice Clarence Thomas led the majority in ruling in favour of the CFPB. In his opinion, he referred back to the creation of the CFPB under the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act.

Thomas argued that, as it was an act of Congress that authorised the CFPB’s funding structure, it cannot be said to have violated the Appropriations Clause.

“Under the Appropriations Clause, an appropriation is simply a law that authorizes expenditures from a specified source of public money for designated purposes,” he wrote.

“The statute that provides the Bureau’s funding meets these requirements. We therefore conclude that the Bureau’s funding mechanism does not violate the Appropriations Clause.”

The CFPB welcomed the verdict, describing the lawsuit as based on a “radical theory” from an industry known for its “predatory and abusive” practices.

“This ruling upholds the fact that the CFPB’s funding structure is not novel or unusual, but in fact an essential part of the nation’s financial regulatory system," it said.

"As we have done since our inception, the CFPB will continue carrying out the vital consumer protection work Congress charged us to perform for the American people.”

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